Oil Market in Fear Amid Iran Turmoil; Economy Ministries Scramble to Secure Non-Middle East Supplies

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Amid the Middle East situation reaching a point of complete uncertainty due to the US and Israel's attacks on Iran, aimed at regime change, the Korean government has been holding daily situation assessment meetings and is working on comprehensive, government-wide countermeasures. With Iran responding by threatening to blockade the Strait of Hormuz-a crucial artery for global crude oil shipments-concerns are mounting over the potential shockwaves this could send through South Korea’s energy import-dependent economy. There are forecasts that, in the short term, simultaneous surges in oil prices and exchange rates, along with subsequent impacts on inflation, exports, and overall growth, will inevitably spill over into the real economy. The government is also grappling with the scenario where prolonged and escalating conflict, coupled with trade uncertainty from reciprocal tariff nullification, could ultimately trigger an oil shock.

On the morning of March 3, First Vice Minister of Finance and Economy Hyungil Lee convened a “Joint Inter-Ministerial Situation Assessment Meeting on the Middle East Situation” to devise measures aimed at preventing instability in the Middle East from spilling over into the real economy. Since March 1, the Ministry of Finance and Economy has led a “Joint Emergency Response Team of Relevant Agencies,” which has been operating around the clock to monitor developments in the Middle East and the impacts on domestic and international financial markets, as well as on energy, exports, shipping, aviation, and supply chains.

In the event of any abnormal signs, the government plans to promptly implement necessary measures through a market stabilization program totaling over 100 trillion won, in close coordination with relevant agencies. The government has also pledged to enforce a strict “one-strike-out” zero-tolerance policy against unfair practices such as the dissemination of fake news that exploits investor anxiety. Vice Minister Lee stated, “Given the high level of uncertainty, relevant agencies will keep all possibilities open and closely monitor changes as events unfold,” adding, “We will convene daily emergency response meetings until the situation stabilizes, so we can respond swiftly to any developments.”

Lee Hyungil, First Vice Minister of the Ministry of Finance and Economy (center), is attending a briefing for the "Emergency Inter-Ministerial Meeting on the Middle East Situation Assessment" at the Joint Briefing Room of the Government Seoul Office in Jongno-gu, Seoul, on the 2nd. Photo by Yonhap News

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Government ministries related to industry and their affiliated public institutions have also moved into emergency response mode. On February 28, the Ministry of Trade, Industry and Energy immediately launched an “Emergency Response Team” headed by the Director of the Industrial Resource Security Office, with participation from relevant departments. A ministry official said, “We cannot rule out the possibility of increased market volatility depending on how the conflict unfolds,” adding, “We plan to thoroughly manage the situation so that the sharp rise in oil prices does not excessively transfer to consumer prices, such as gasoline and gas rates.” Korea Electric Power Corporation (KEPCO) will hold an emergency meeting this afternoon via videoconference, with the CEO, all executives, and relevant department heads in attendance. The meeting will include a briefing on the results of the energy situation assessment meeting chaired by the Second Vice Minister of the Ministry of Climate, Energy and Environment the previous day, and will review the response status of KEPCO’s overseas operations as well as the impact on and response plans for power supply and demand.

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The government is closely watching the possibility that the current crisis could spill over into the real economy. The government believes that, given the United States is continuing joint attacks with Israel with the goal of regime change in Iran, and with no clear end in sight to the war, a sharp rise in international oil prices is inevitable in the short term, regardless of how the situation unfolds. On March 2, the first trading day after the US and Israel launched the initial surprise strike, international oil prices (Brent) closed up 6.7%. At one point during trading, prices surged over 13%, surpassing 82 dollars per barrel. While some believe that the current oversupply in the market means this crisis may not cause major supply disruptions, others warn that in the worst-case scenario-where the world’s largest oil shipping route, the Strait of Hormuz, is fully blockaded, triggering an oil-shock-level crisis-the ripple effect could deal a severe blow to commodities, bond yields, and economic growth rates. Market research firm Capital Economics analyzed, “If the crisis drags on, oil prices could jump to the 100-dollar-per-barrel level, pushing up global inflation by 0.6 to 0.7 percentage points.”

The government is monitoring the possibility that Iran, as a retaliatory measure, could fully blockade the Strait of Hormuz or strike oil refineries in neighboring countries. The Strait of Hormuz is a key route for Middle Eastern crude oil imports to South Korea, accounting for about 20% of global crude oil shipments and about 40% of seaborne oil transport. With the Islamic Revolutionary Guard Corps (IRGC) warning that it would “set fire to all vessels attempting to pass through the strait” and global shipping companies successively abandoning operations, the Strait of Hormuz is already no longer functioning as a normal shipping route. A Ministry of Finance and Economy official explained, “Although we have sufficient oil reserves, we plan to secure supplies from outside the Middle East in preparation for a possible blockade of the strait.”

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Experts pointed out that, with economic uncertainty heightened by the nullification of reciprocal tariffs and other factors, the government should focus on minimizing risks. There are also concerns that the risk of inflationary pressures from soaring oil prices could undermine the effect of fiscal expansion policies intended to achieve 2% economic growth. Insu Kang, professor of economics at Sookmyung Women’s University, said, “In the short term, it is necessary to focus policy capacity on controlling inflation,” adding, “If the crisis drags on, the burden could expand across the real economy as a whole, so agile responses to exchange rate and oil price volatility are essential.”

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